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Home News Bank of America Raises S&P 500 Year-End Target by 7%, Favors “Old Economy” Stocks

Bank of America Raises S&P 500 Year-End Target by 7%, Favors “Old Economy” Stocks

by sun

In a recent update, BofA Global Research has revised its year-end target for the S&P 500, projecting a nearly 7% increase compared to its previous forecast. The financial institution also highlighted the potential for “old economy” stocks within the blue-chip index to outperform their newer technology-focused counterparts.

Bank of America now anticipates the S&P 500 to conclude 2023 at 4,600 points, which marks an increase from its earlier estimate of 4,300 points and a 3.5% rise from the index’s closing value of 4,443.95 on the preceding Tuesday.

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Throughout the current year, the S&P 500 has exhibited a 15.7% gain, primarily driven by the robust performance of a select few mega-cap growth stocks, including Nvidia (NASDAQ: NVDA) and Meta (NASDAQ: META), which have capitalized on the artificial intelligence (AI) wave.

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While the momentum of this rally has shown signs of moderation, Bank of America maintains a “neutral” to “positive” outlook on U.S. equities. Its strategists, led by Savita Subramanian, express a preference for equal-weighted stocks, a choice which differs from market capitalization-based indices like the S&P 500, where larger companies carry more significant influence. Subramanian underlines that equal-weighted stocks tend to exhibit less volatile earnings, narrower disparities in analyst estimates, and represent a more cost-effective and less crowded alternative to growth stocks.

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Despite the emergence of bearish narratives surrounding equities, Bank of America contends that “old economy” stocks, notably value stocks found within the equal-weighted S&P 500, could deliver comparable gains to their tech and growth counterparts. According to Subramanian, these stocks have not been priced as aggressively.

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Additionally, Bank of America points out that equal-weighted stocks have historically outperformed mega-cap stocks during previous recovery cycles. They may also serve as a hedge against duration risks when compared to safer assets such as bonds.

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While the valuation of the S&P 500 aligns with its historical average on an equal-weighted basis, the valuation gap between the index’s top seven stocks and equal-weighted (SPW) stocks currently stands at its widest point since the 2001 Tech bubble, according to Subramanian. This suggests potential upside in SPW stocks.

Nonetheless, mega-cap stocks also remain in contention if they can maintain attractive valuations, as exemplified by Meta’s cost-cutting measures and buyback announcement earlier this year, according to Subramanian. The strategist suggests that tech companies focusing on shareholder returns, efficiency, and optimizing cost structures may chart a path to outperformance in the current environment.

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Several brokerages, including Morgan Stanley, have recently advocated for cyclical sectors, particularly energy, as a viable approach for trading stocks leading up to the year-end.

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